In their recently released budget proposals, two longtime Republican governors, Sam Brownback (Kansas) and John Kasich (Ohio), are taking major risks by pushing for tobacco and alcohol tax hikes.
Governor Brownback’s plan calls for an tax increase on cigarettes from 79 cents to $2.29 per pack and a 50 percent sales tax hike on liquor. Governor Kasich is seeking a cigarette tax hike from $1.25 to $2.25 per pack, as well as higher taxes on cigars and e-cigarettes (a safer-than-smoking alternative).
Obviously, Governor Brownback is in a bit of a bind. First, he delivered income tax cuts to the people of Kansas, despite criticism from both the left and the right that the plan might not be structured properly. While he survived the midterm election, he now faces a budget shortfall of $648 million. Governor Kasich on the other hand, is looking to tobacco tax increases to pay for roughly $5.7 billion in income tax cuts.
Both governors are right to take aim at their states’ income tax rates. After all, most economists agree that of all types of taxes, the income tax is the most significant hindrance to economic growth. Taxpayers deserve to take home more of their hard-earned pay, and businesses could use income tax relief to create more jobs. A widespread recent article from Gallup explains that the number of jobs in America today is at an all time low. State leaders should work harder to craft policies that could improve this dire situation, especially since Washington has only created more economic woes in recent years.
Unfortunately, states taking aim at tobacco to fill budget gaps or pay for tax cuts is extremely problematic. History has shown that revenue projections from cigarette tax increases come up short. According to National Taxpayers Union’s latest cigarette tax study, roughly 7 out of every 10 state-level tobacco tax hikes enacted between 2001 and 2011 resulted in lower-than-anticipated revenues.
All too often, this meant additional levies were soon to follow. Imagine that: tax increases leading to even more tax increases. Our study found that 66 out of 96 tobacco tax hikes were followed by additional hikes within 2 years.
Furthermore, we found that states with high cigarette taxes tend to have higher tax rates across the board. It’s a lose-lose situation for smokers and non-smokers alike!
Of course, it’s no surprise that businesses in nearby Missouri are celebrating Brownback’s proposed $1.50/pack hike. Bordering states’ coffers and businesses often stand to benefit from these types of targeted taxes.
It’s very much the same with liquor tax increases. As the Tax Foundation has stated, “Increased alcohol excises would, however, place significant burdens on legal consumers of alcohol and worsen existing inequities in the tax system. Moreover, alcohol taxes have been found to be one of the most economically inefficient ways of raising government revenue.”
Simply put, both Brownback and Kasich are targeting so-called “sin taxes” because they see them as politically convenient targets. But if these proposals become reality, we should not be surprised to see missed revenue goals and even larger tax hikes in both Kansas and Ohio in the near future. Taxpayers in these states should take note and oppose these aspects of their governors’ latest proposals.